Correlation Between Near and HOT

Can any of the company-specific risk be diversified away by investing in both Near and HOT at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Near and HOT into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Near and HOT, you can compare the effects of market volatilities on Near and HOT and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Near with a short position of HOT. Check out your portfolio center. Please also check ongoing floating volatility patterns of Near and HOT.

Diversification Opportunities for Near and HOT

0.89

Correlation Coefficient

Near  HOT

Very poor diversification

The 3 months correlation between Near and HOT is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Near and HOT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HOT and Near is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Near are associated (or correlated) with HOT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HOT has no effect on the direction of Near i.e., Near and HOT go up and down completely randomly.

Pair Corralation between Near and HOT

Assuming the 90 days trading horizon Near is expected to generate 1.22 times less return on investment than HOT. But when comparing it to its historical volatility, Near is 1.11 times less risky than HOT. It trades about 0.21 of its potential returns per unit of risk. HOT is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  0.16  in HOT on September 1, 2024 and sell it today you would earn a total of  0.18  from holding HOT or generate 113.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Near  vs.  HOT

Near

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Near are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Near exhibited solid returns over the last few months and may actually be approaching a breakup point.

HOT

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in HOT are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, HOT exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Near and HOT

The main advantage of trading using opposite Near and HOT positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Near position performs unexpectedly, HOT can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in HOT will offset losses from the drop in HOT's long position.

The idea behind Near and HOT pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .